A world without cryptocurrencies is fast becoming an impossibility as these increasingly popular digital currencies gradually find their way into the mainstream financial system.
The unparalleled success of cryptos, even reaching a $2.24 trillion market cap in just 12 years, has led many people to regard them as “dangerous” and “speculative bubbles”. Others genuinely believe this could replace fiat currencies, disrupt modern financial systems and change how we interact with money in the coming years.
Both sides have pretty good reasons to paint their respective pictures of the future of cryptocurrencies, but could one be right and the other wrong? We would attempt to find out in this piece.
Cryptocurrency Market Performance 2021: Bitcoin vs. Altcoins
2021 has been an outstanding year for cryptocurrencies starting with a strong bull run in January following the launch of Ethereum 2.0, the popularity of non-fungible tokens (NFTs), the propagation of decentralized finance (DeFi), and new institutional interests in Bitcoin.
Bitcoin hit multiple new all-time high (ATH) prices this year, and more institutions either invested heavily into it or adopted it as a payment method.
While Bitcoin remains the crypto king hitting multiple new all-time high (ATH) prices this year – the highest being $64,800 in April – we witnessed the unprecedented performances by several altcoins.
Ethereum went over 500% up in 12 months from $746 ATH (all-time high) in December 2020 to more than $4000 ATH in December 2021. But even that was dwarfed by the 7998.67% rallied by Solana (SOL) – an Ethereum-alternative blockchain network – or the astonishing 15,0000% gained by Ecomi (OMI) – a marketplace for trading premium digital goods and NFTs – the highest performance this year.
Thanks to media inputs from investors and enthusiasts, people’s interest in cryptocurrencies soared this year. The acceptance of Bitcoin as a payment method by Tesla Motors early in 2021 (even though they discontinued support) and El Salvador making Bitcoin a legal tender contributed to the cryptocurrencies’ meticulous performance.
However, this technology is still in its infancy, rapidly evolving, and influenced by numerous internal and macroeconomics factors. This translates to massive price volatilities where big climbs can easily be followed by massive dips, as seen with Bitcoin several times this year. As a result, it’s difficult to predict where things are headed in the long term or tell if cryptos would be what they are today a decade from now.
To get a glimpse into the future of cryptocurrency, we must look at crucial factors molding the industry today and determining tomorrow’s outlook.
Factors Shaping the Future of Cryptocurrencies
High transaction fees and long processing time remain among the biggest problems with transacting cryptocurrencies, especially bitcoin. Ethereum was a slight response to that, but today, many more new blockchains have emerged with promises of faster, cheaper, and more secure cryptocurrency transactions.
Solana (SOL), the leading Ethereum-alternative blockchain network, can process 50,000 transactions per second – an astounding feat! It has also received massive support since it reduces Ethereum’s gas prices allowing developers to build projects faster. Other alternative blockchains that promise to solve cryptocurrency transactions hurdles are CELO, SOURCE, Terra, Avalanche, Polkadot, and more.
What this means for cryptocurrency’s future is more mainstream commercial adoption as a medium of exchange. The faster and cheaper it gets to buy and sell with cryptos, the more businesses would accept them as a means of payment.
Governments’ Interests And Cryptocurrency Regulations
The U.S government and other lawmakers across the world are seeking ways to protect cryptocurrency investors while shunning off cybercriminals using regulations. These regulations would be centered around over-the-top cryptocurrency activities like stablecoin issuing, crypto taxes, and crypto investment vehicles. They cannot directly impact in-depth activities that occur within blockchain networks.
One of these regulations is the introduction of crypto tax which subjects the profits you earn on the sale of cryptos to capital gains tax rules. There are also talks by the U.S legislators to expand the definition of a ‘brokerage’ to include companies that facilitate digital asset trades like cryptocurrency exchanges. This would effectively tax reporting activities which the IRS can use to track tax evasions and possibly clamp down on cryptocurrency crimes.
In November 2021, the Biden administration also submitted a proposal to classify stablecoin issuers as banks which would subject them to similar regulations as banks that protect consumers. Since stablecoins are pegged to fiat, including the US Dollar, legal sanctions could prevent money laundering through coins like USDT.
While there is no tangible action plan for how the U.S Security and Exchange Commission (SEC) intends to achieve many of these regulations, it shows that the officials are paying attention to the cryptocurrency markets and are interested in protecting investors. Many experts believe that sensible regulations are a good thing for the industry as they would boost investors’ overall confidence in cryptocurrencies.
Broader Institutional Adoption
This year, many companies across industries took an interest in cryptocurrency and blockchain and invested in them in some cases. Tesla Motors made headlines in February when it bought $1.5 billion worth of Bitcoin to hold on its balance sheet. Although later sold, the company wants to allow customers to use the currency to pay for cars.
Tesla is not the only mainstream brand taking up crypto projects.
Facebook changed its name to Meta as part of the company’s objectives to contribute to building the Metaverse – a blockchain, NFTs, and Web3 based virtual reality universe. IBM is helping businesses integrate blockchain into their processes. Mastercard announced in February that it would let merchants accept selected cryptocurrencies through its network later this year. Paypal and Block (formally Square) are also betting on incorporating crypto payments on their platforms.
Recently, Amazon launched their very own blockchain-based Amazon Token (AMZ) to “facilitate a more accessible, more connected global financial system.” Kodak, the 130 years old camera company, is using blockchain to protect the copyrights of images and videos. Stripe, Starbucks, Walmart, Twitter, and many more companies are joining the cryptocurrency space.
Big names accepting crypto payments or designing theirs could trigger more retailers, especially small-and-medium merchants, to accept popular cryptos like Bitcoin and Ethereum. While the actualization of a crypto-dominated payments market is still a long way off, the more ‘real world’ uses cryptocurrencies have, the more likely demand and value will increase.
Cryptocurrency exchange-traded funds (EFT) are relatively new digital assets that aim to make it easier for regular stock investors to get into cryptocurrencies. The very first ETF – the Bitcoin ETF (BITO ETF) – got SEC approval and just debuted on the New York Stock Exchange in October 2021.
Much like stock or index ETFs, a cryptocurrency ETF is an investment fund tracking the price of one crypto or a basket of different digital tokens. Even though the current BITO ETF holds only Bitcoin futures contracts linked to Bitcoin price and not real Bitcoins, progress is made to create ETFs that hold actual cryptos.
Crypto ETFs would allow investors to buy in on cryptocurrencies directly from traditional investment brokerages they are already familiar with. They do not need to deal with cryptocurrency exchanges (like Binance, Coinbase, etc.) or bother with keeping their crypto safe with the security measures needed for holding crypto.
This is important because more people would take speculative and educational interests in cryptocurrencies. The more non-crypto people invest in cryptocurrency ETFs, the value of cryptocurrencies could rise with it.
Crypto Investors And Community
Behind the cryptocurrency market are several communities of enthusiasts, developers, and investors working to keep cryptocurrencies relevant. We must not forget that Bitcoin took off and grew on the backs of early believers. Their dedicated passion and work contributed to what took a seemingly worthless technology to $0.11 and from there to over $60,000!
Many investors buy and hold crypto as a store of value due to a lack of faith in the devaluation of fiat currencies. Enthusiasts are more about changing today’s financial system, taking central authority away from banks, and giving people complete control over their money. Developers are driven by innovation and the need to advance the future of money.
As long as these three groups of believers remain committed to evolving cryptocurrencies, these digital assets will be around for a long time.
Despite these positive prospects of cryptocurrencies, certain factors threaten how they thrive in the coming years. Let’s see those quickly.
Threats to Crypto Future Outlook
Price volatilities consistently hamper the real-world use of cryptocurrencies. For example, if you sold your customer a nice car for 1 Bitcoin when it was valued at $64,000/1 BTC, you would have lost a whopping $16,000 months later when prices fell to $48,000.
Again there are just so many cryptocurrencies flying around that all of them can’t be adopted as payment methods in physical commerce. Platforms accepting two or more crypto payments usually face conversion issues, especially in choppy markets when prices greatly fluctuate. The fees attached to crypto-to-crypto conversations also make life difficult for these platforms.
Platforms like Ubeswap and AnySwap make swapping cryptocurrencies a bit easy. Nevertheless, these are some of the reasons why many vendors hesitate to integrate cryptos as part of their payment method.
Countries Banning Cryptos
Cryptocurrencies are perceived as illegal or a threat to economic security in some countries; hence they are banned in these countries. At one point, China claimed they had the highest Bitcoin miners in the world until the Chinese clamped down hard on mining and all decentralized related activities in the country.
The emergence of China’s regulated and centralized Digital Yuan isn’t helping matters. While the Chinese government claimed that the ban was to reduce energy consumption and greenhouse fuel emissions associated with crypto transactions, some believe cutting any competition for the Digital Yuan may have been part of the reasons.
Nigeria, the largest cryptocurrency market in Africa, banned banks and financial institutions from providing on and off-ramp crypto services in 2017. The announcement even threatened to shut down bank accounts found using crypto exchanges. The country joined the Central Bank Digital Currency (CBDC) revolution when it introduced the e-Naira in October 2021.
Other countries banning cryptocurrencies for one reason or another include Bangladesh, Egypt, Morocco, Qatar, Ecuador, Vietnam, Turkey, and Russia.
Government-Backed Digital Currencies
Central banks and federal reserves all over the world are exploring the use of digital currencies as a solution to paper money challenges and the threats cryptos pose to fiat currencies.
Referred to as Central Bank Digital Currencies (CBDC), these digital fiat currencies would effectively be a form of digital cash and have a spectrum of cash properties, depending on their design. Many CBDCs might be based on blockchain for its distributed ledger and token-based advantages.
As of today, around 81 countries are exploring CBDC developments, with 13 already in advanced stages. China’s Digital Yaun is leading the pack and has been introduced on major e-commerce platforms within the country. Sweden is in the testing phase of the e-Krona, while The Bahamas have prototyped the Sand Dollars since 2019.
While CBDCs are not cryptocurrencies, they could cause a decline in public trust in cryptocurrencies. Bitcoin and all cryptos, in general, started as a result of a loss of trust in government institutions behind money. Crypto could lose some of its appeal if governments can re-establish public trust in fiat currencies using digital and blockchain techniques – especially in stabilizing the value of money.
Cryptocurrencies are secured by public-key cryptography, which protects crypto transactions by encrypting communications for everyone other than the intended recipient. Underlying a public key, which everyone in a blockchain network can see, is the private key which only you can see.
Quantum computing is generally regarded as the next age of computing and perhaps poses the biggest threat to the entire cryptocurrency system. In a nutshell, quantum computers perform very complex computational tasks at much higher efficiency and at several million times the speed of regular computers.
If quantum computing continues to advance, it can be used to crack public key encryptions allowing attacks to steal private keys to digital assets (cryptocurrency, NFTs, etc.) and impersonate as legitimate owners. Quantum computers could do this by solving cryptography’s factorization problems in a dramatically shorter time. Cracking cryptography is almost a certainty at that speed, and digital wallets can be emptied.
The good news is that cryptographers are racing to develop post-quantum cryptography. This technology uses the same quantum mechanics as quantum computers to secure the distribution of encryption keys. This would effectively make it harder for quantum computers to break digital wallets. Researchers at Ethereum Foundation, Hyperledger Foundation, and Cambridge Quantum Computing are at the forefront of this technology.
Cryptocurrencies: The Future
The many positive and threatening factors surrounding cryptocurrencies make it difficult to picture how the space would look years from now. What we do know is that cryptos would likely co-exist with fiat currencies for the foreseeable future. The advent of government-backed digital currencies would put fiat currencies almost on par with cryptos, which could ensure a war of trust.
While CBDCs would be established as legal tenders in many countries, make transactions easier, and benefit cross-border payments, cryptocurrencies would maintain their relevance owing to decentralization and market sentiments. Kenneth Rogoff, a formal IMF chief economist & Harvard professor, predicts cryptocurrencies’ market cap could explode to $5 – $10 trillion over the next 5 years.
Many of the security and transaction difficulties facing cryptos today would be surmounted as technologies advance. For one, new blockchains and quantum computing would completely change the way cryptos are bought, sold, and stored.
Eventually, we would get to a point where crypto transactions are faster than e-wallets and credit card payments. This, together with the success of cryptocurrency projects undertaken by several large companies and banks, would drive more businesses to integrate cryptos as a payment method.
What would be harder to overcome is government scrutiny surrounding cryptocurrencies the more popular they become. There are no guarantees more governments would ban cryptos like China and the likes or accept them like El Salvador. What we do know is that more authorities would pay attention and most likely develop policies regarding the use of cryptocurrencies in their countries. Only time would tell how these would affect cryptos.
Cryptocurrencies that would become part of the mainstream financial system would have to satisfy several criteria. They need to be so easy on the surface for users to understand and businesses to seamlessly integrate, yet complex inside to avoid hacker attacks. They need to lend themselves to some regulation in terms of adequate user protections and anti-money laundering activities, yet maintain decentralization and users’ privacy.
Only a few of the digital coins we have today would ever attain such a feat. While Bitcoin and Ethereum currently lead the pack in the race to make that happen, there is no guarantee an entirely new coin with better technology, and use cases would not emerge and overtake them both!
The world is moving entirely virtual, and digital tokens would be an important part. However, the chances that cryptocurrencies would completely phase out fiat currencies (digital or physical) are very low. Instead, their coexistence would give individuals and businesses the freedom to adopt what form of currency they are comfortable with for various reasons.
he choices we make would determine if a single or few cryptocurrencies would ever become the worldwide medium of exchange or not.
For a guide on what to invest in and how, or more information on what the future of crypto is, especially for your income and investment portfolio, book an appointment with our cryptocurrency consultant today.